Intraday Trend Trading: Is the Trend Really Your Friend?

Trend Trading

We are told that “the trend is your friend.” But is it really? Have you ever seen statistically valid evidence that either proves or disproves this well-worn market maxim?

Does trend trading reveal an intraday market edge? Should you be trading with the trend, with your intraday trading?

The answer is yes. And we would like to present evidence that suggests that trend trading is the best option for new traders. Included is a practical strategy that disproves the efficient market hypotheses and serves as a launch point in which to develop your own custom trading strategies.

When it comes to intraday trading strategies, is the trend really your friend?

We often hear this oft-repeated maxim about how we should always trade with the trend. That we should, “go with the flow” and that “trend trading works.” We are told that trading against the trend is a sure-fire path to financial ruin.

And, we also hear and read about magical trading indicators and supposed “order flow” techniques that can supposedly predict market tops and bottoms.

As usual, the truth lies somewhere in the middle. This space in which market falsehoods occupy and perpetuate can seem as long, lonely and barren as a drive across the state of Texas. Those of you that have driven across Texas know exactly what I am talking about.

Anyway, I wanted to take a moment today and talk about intraday trends. And a simple trading indicator that you can use that is both elegant, statistically valid, robust, and might just save your ass from blowing up yet another trading account.

The Mid-Point of the day

The mid-point of the daily range is a simple indicator. Suppose that are you are trading the Emini SP500 futures contract. And the high of the day is 2350, and the low of the day is 2300. What is the mid-point? No fancy calculator needed. The mid-point would be 2325.

And so, if you are trading intraday, a long position above 2325, then you are quite simply trading with the trend.

Conversely, if the price of the Emini-SP500 is below the midpoint of 2325, then we would consider the immediate trend to be down. If you are short below 2325, then you would also be trading with the trend.

The concept is ridiculously simple. And it also conforms with the theory of Occam’s Razor, that which is most easily observable, and most obvious, is usually the best answer. For instance, if you observe 10 chickens in a henhouse, then you are most likely going to see eggs. If you see a wolf dressed like a chicken, and he is selling a trading indicator, then he is most likely trying to steal your eggs (or your chickens). What is most easily observable will usually yield the most statistically valid answer.

So let’s jump back into our super simple trading theory that if the current price of the Emini SP500 is above the mid-point of the trading day, then we want to only be a buyer. Nothing complicated here. We want to use this simple observation to hopefully predict the future.

Conversely, if the price of the Emini SP500 is below the mid-point of the trading day, then we only want to be a seller.

This is the quintessential meaning, and most easily defined and elegant approach to trend trading. Going with the flow. Let’s test our theory with actual trading data.

Our Mid-Point Strategy Defined

With the following test, we are going to use 5-minute bars of the Emini SP500 futures contract.

Before we take any trades, we are going to wait 2 hours. We want to simply observe the first 2 hours of the trading day. We want to let some sort of market structure develop.

After 2 hours, we then calculate and plot the middle point of the intraday range. As the market moves to new highs or new lows, then the middle point of the day will continue to adjust higher or lower.

We only want to take trades in the direction of the trend. So if the price is above the middle point of the day, then we only want to take long trades. If the price is below the middle point, then we only want to take short trades.

Our entry point for buy signals is exactly as follows:

Wait 2 hours.

Calculate the middle point of the intraday range.

If the low of a 5-minute bar crosses above the mid-point, then we want to buy at the market.

Exit the trade for whatever profit at the end of the trading day.

Exit the trade for a loss if the high of the 5-minute bar crosses below the mid-point of the day.

The following example is a winning trade:

But what if we are wrong? How do we exit the trade? We will use the exact same logic to exit the trade.

If we are long, we exit the position if the high of the 5-minute bar crosses below the mid-point of the intraday range.

The exit conforms to our entry logic, that if the price is above the mid-point we want to be long, and if the price is below the mid-point then we want to exit our long position.

The example below is what a losing trading looks like:

The entry and the exit are simple, congruent, easy to identify and keep with the Theory of Occam’s Razer that simplicity and easily observable events tend to yield the most robust answers.

The following equity curve highlights the stupid simple concept of always “trading with the primary trend” by only using the mid-point of the intraday range.

Maybe the trend really is your friend?

With an astounding sample size of 3,654 trades over over the past 17.5 years, we can see the robustness of the approach.

But many readers are probably already screaming foul! And they are saying, “hey smart ass, know nothing Emmett, this supposed genius (con artist, jail bird, felon, hustler, scoundrel, etc) …these trades were in the stock market and are only LONG trades. And the stock market has basically only gone in one direction. Up.” Correct! So now we have to look at how our system performed on the Short trades.

Shorting the Stock Market: A suckers game?

Now we are going to reverse our strategy, and only take short trades, trading the Emini SP500 futures contract. Which since 1929, going short the SP500 has basically been a fool’s errand.

Once again, the exact rules are as follows:

Wait 2 hours.

Calculate the middle point of the intraday range.

If the high of a 5-minute bar crosses below the mid-point, then we want to sell at the market.

Exit the trade for whatever profit at the end of the trading day.

Exit the trade for a loss if the low of the 5-minute bar crosses above the mid-point of the day.

The following is what a winning trade looks like:

But what if we are wrong? How do we exit the trade? We will use the exact same logic to exit the trade.

If we are short, we exit the position if the low of the 5-minute bar crosses above the mid-point of the intraday range.

The exit conforms to our entry logic, that if the price is below the mid-point we want to be short, and if the price is above the mid-point then we want to exit our short position.

The example below is what a losing trading looks like:

The following equity curve highlights the stupid simple concept of always “trading with the primary trend” by only using the mid-point of the intraday range.

With an astounding sample size of 3,457 trades over the past 17.5 years, we can see the robustness of the approach.

So now that we have investigated both the long side and the short side, by using only the mid-point of the intraday range, let’s combine the results. The following are the combined results of trading both long and short, using only the mid-point of the intraday range.

Is this trend trading strategy robust?

Absolutely, for just the Emini SP500 futures contract, the total sample size is over 7000 trades. This is a massive amount of data. If the market were truly random, then the equity curve would be flat, and the trade expectancy would be close to $0.

Sometimes you just have to trust the Law Of Large Numbers, which simply states that the larger the sample size, the more reliable the statistical output.

But is this strategy ready to be deployed and traded AS-IS? Absolutely not. The truth is that the average trade size is only $16 per trade. Not enough to outpace slippage and commission.

However, the sample size of 7,000 gives us a huge amount of space in which to introduce and test different scenarios in which we should be taking trades and not taking trades. And these different scenarios will be the launch point of many new articles that I will be writing that find, and expose these market biases.

Trading Strategy development should be like making soup.

This might sound strange. But when making a soup, you have to start with a stock. You have to boil out large quantities of bones of vegetables. And you are ultimately left with a rich and nourishing broth. A base in which to add different ingredients, to find the right taste, texture, and nutrition.

Same goes with trading strategy development. You need to find these large biases that disprove the efficient market hypothesis. You need to find and isolate these broad and wide occurrences, like the Mid-Point Trading Strategy that we have just tested. Something that initially yields a large broth of statistical edge. And then you need to start working on the data, introducing different scenarios that whittle down the sample size and yield an average trade that financially makes sense. That outpaces slippage and commissions.

In future blog posts, we are going to be taking the Mid-Point Trading Strategy, and treat it like a soup broth. We will then be adding and subtracting interconnected data points from other markets, in the hope that we can find something that launches your own imagination into unknown territory.

Thanks for reading.

This was a pretty long blog post. And the topic might have been difficult for many to follow. Many readers are unfamiliar with trading strategy development. So we are going to take it very slowly. And release trading strategies that “stair-step” from a basic concept with a large amount of “broth” into more refined concepts that yield a full blown delicious soup. Something that will yield actual nourishment and inspire your imagination towards places from where your genius is hidden.

And if you have any trading ideas that you simply cannot program, and are curious if any legitimate market edge exists…let me know. I can program and test just about any idea that you can imagine.

Thanks for the sharing of these strategy ideas. I’d agree capturing the trend is the ideal trading goal although I’d doubt orderflow really helps in this area except for maybe HFT microscalping ticks of a bar. Having already been through the rigamarole phase of past testing, I’ve personally ditched the automated strategy searching and have went back to manual trading. Although I’d agree it can be somewhat helpful to explore trading ideas using strategy testing tools and discovering a possible edge of a trading idea with a good size sample set makes sense. Interesting to see tradingschools start to give… Read more »

Thanks for all you do Emmett! You really are one in a million….not only do you expose the scammers but you share ideas that actually work! Looking forward to reading about your trade with the trend strategies!